There are a couple of points I want to make about the way the market is trading:
- Ever since the stock market began its recession fear slide in the third quarter of 2015, dividend-oriented securities have dramatically outperformed. Utilities, REITs, tobacco stocks and other consumer staples, and long duration, high quality bonds have been big winners. Of course, there is a market cycle. As investors begin to believe that the economy is going to be okay, they venture out into more economically sensitive areas like industrials, energy, and materials. There is usually a period of overlap where defensive securities are still getting a “fear” bid while “offensive” securities begin to get a “greed” bid. The overlap period for this cycle appears to be ending. Last week might have marked the apex for defensives, as several gained little or nothing after Tuesday and are declining outright this week. You should be very careful about chasing year-to-date winning funds right now. Low volatility funds/ETFs are over-owned and could be vulnerable.
- The U.S. dollar is down about 4.5% on the year and over 6% off its December 2015 peak. This has been a major factor in the rebound of commodities and stocks over the past two months. Much of world trade is conducted in dollars, and we had reached the point where nobody could afford them. The lower dollar improves the balance sheets of all of our trading partners, allows commodity prices to rise, and makes U.S. produced goods more competitive in global markets. It also provides a nice tailwind for foreign securities which are relatively cheaper right now. It is always nice when value and momentum (month-to-date EAFE leads SPY by 5.52% to 1.25%) line up on the same side. See Figure 1. When value also has momentum it’s generally a good time to invest. Normally, buying cheap means you must put up with poorer momentum.
Source: YCharts.com, 4/1/16 – 4/21/16
- If the economy continues to show improvement and IF investors begin to anticipate that the Federal Reserve is more likely to raise interest rates, then I believe investors will pull money out of REITS and utilities in favor of financial stocks. Financials were hurt by yield curve flattening when a global recession seemed to be in store, and they stand to be negatively impacted by a negative interest rate policy. It thus follows that the further away from that scenario we get, the better for bank stocks. If at the next Fed meeting (next week) Yellen’s tone moves back from dovish to neutral, as I expect, financials could benefit.
 Source: Telemet as measured by iShares Cohen & Steers Realty Majors, Utilities Select Sector SPDR, and Altria Group.
 Source: Telemet as measured by PowerShares DB US Dollar Index
 As of 3/31/16 the Price to Earnings ratio of the MSCI EAFE was 14.5 versus the S&P 500’s PE ratio of 16.5. Source: JP Morgan Asset Management, 2Q16 Guide to the Market.
 Source: YCharts.com